Perspectives

The View from Next Street

A sharing of ideas and policy perspectives.

 

Today, the majority of America’s population resides in metropolitan areas, now widely acknowledged as the drivers of our national economy. Thus, sound urban policy is critical to economic vitality now more than ever. Fortunately, the U.S. is home to an array of talented experts, veterans, and academics in urban policy and planning, with promising students on the way from outstanding programs in colleges and universities. Bob Weissbourd, our guest editor, is one of those nationally renowned experts. Bob is the founder and President of RW Ventures, a consulting firm that develops market-based strategies for regional and community economic development. Bob served for 10 years in executive positions at ShoreBank Corporation, the community development bank founded in Chicago in 1973 that now has affiliates across the country and provides consulting and support services around the world. ShoreBank pioneered a model of for-profit lending in underserved communities that resonates with the ideas and strategies that drive Next Street.

In this Perspectives piece, Bob looks at some of the conflicts that have polarized America’s debate on urban policy over the years. Should we prioritize economic growth or equity? Should we look to government to drive equitable economic development, or can market-driven strategies address that task? Should regions, metropolitan areas, or cities serve as the template for economic development efforts? Bob argues convincingly that these are false conflicts, and at Next Street we know that his arguments are right on target.

Tim Ferguson

printOld Conflicts: New Opportunities

by Robert Weissbourd, President, RW Ventures, LLC

 

Public debate on economic development policy often seems trapped in old conflicts. We argue about the relative benefits of focusing on growth or equity, supply side or demand side, markets or government, business or development, regions or neighborhoods, people or place. In private, however, increasing numbers of practitioners, scholars and policymakers across the political spectrum are recognizing that this rhetoric reflects outdated political framing and, worse, bad economics1. Many of these subjects, of course, have always had a more complex – and compatible – relationship. Now, broad changes in the global economy offer new opportunities to transcend these old conflicts. We can aim for inclusive prosperity.

Growth and equity
In the traditional view, we must choose between investing in economic growth or spending to achieve equity. Those who want to invest in growth argue that it will help everybody: “a rising tide lifts all boats” or prosperity will “trickle down.” Those who argue for prioritizing equity note that increasing wealth recently has not necessarily resulted in increasing equity. They offer both a moral argument and, increasingly, an economic argument that developing our underutilized assets, and reconnecting them to the economic mainstream, will “bubble up.” The supposed conflicts between supporting business and development, and between supply-side and demand-side approaches, reflect similar themes.

In practice, the evidence is mounting that growth and equity need not conflict: they can be symbiotic. Economics is not a zero sum game. We can invest in economic growth in ways that do lift many “boats,” and we can undertake asset-based development in ways which grow the economy overall. When we create new value through innovation2, the economic “pie” gets bigger. Bill Gates’ wealth did not occur primarily at someone else’s expense; rather, it reflects value creation and increased productivity across the economy. Similarly, if millions of poor people become more productive and enter the middle class – whether in India, the Lower Mississippi Delta or the distressed inner city areas of our country – net economic growth occurs. Developing and reconnecting underutilized human capital, real estate and business assets can result in expansion of the economy, growing markets and producing new goods and services.

These facts provide a hint – a direction of inquiry – for how best to reconcile growth and equity goals in practice. They suggest that growth can “lift all boats” when it flows from broad and inclusive value creation, and that addressing equity does “bubble up” when it is done by investing in development and deployment of wasted assets into the economy. We can invest in much more targeted ways to deliberately align growth and equity, increasing productivity in ways which are inclusive.

The global knowledge economy offers major opportunities for this more strategic approach. We can target investment in research and product development that will expand specific industries or markets in ways that enhance development impact. The economic growth and equity goals may align by virtue of the nature of the industry, such as growth in medical services, which offers entry level jobs, and provides needed services. Alternatively, the alignment may occur by virtue of the nature of the market expansion, such as where new banking products are developed for the under-banked. We can look for innovations that create accessible employment opportunities, expand investment in neighborhood assets, provide specialized products and services to underserved areas, or create new opportunities for entrepreneurship. We can invest in expanding human capital – from formal education to workforce development to lifelong learning – the single biggest driver of both individual and overall economic prosperity. We can create the 21st century networks and infrastructure, particularly digital infrastructure, which will increase the productivity of people and businesses while enabling marketplaces to expand and be more inclusive.

Just as we need not choose between growth and equity at the system level, we need not choose between business and development at the practical level. Development is often best undertaken as a business, as the economic development field is learning through the experience of organizations like ShoreBank and The Reinvestment Fund.

Markets and government
Joseph E. Stiglitz, the Nobel Prize-winning economist, recently commented that Barack Obama’s speech on financial policy was, for economists, as groundbreaking as his landmark speech on race. The speech traced arguments about the respective roles of government and the private sector to the Founding Fathers, and highlighted that “Main Street” and “Wall Street” share a common destiny. Indeed, as the economic development world is discovering the power of markets and market-based development, the private sector is increasingly acknowledging the critical roles of government in enabling markets to work efficiently.

On the one hand, we need to harness the power and effectiveness of individual initiative and entrepreneurship, and of market mechanisms. After all, markets are the mechanism in our economy for investing in assets, and thus for creating wealth. Ultimately, markets are how our underinvested assets will get deployed and thereby realize their value. Also, the effectiveness of markets reflects that individual choice provides powerful incentives and self-regulating mechanisms. This implies that more programming, even for activities that are not primarily market-based, should put resources and decision-making power directly in the hands of individuals, who can then act more as customers, holding the programs and systems meant to serve them more accountable. This approach suggests experimenting with individual accounts and vouchers for everything from workforce training to small business support services.

However, as this approach is being applied in areas where market imperfections are more likely – and potentially devastating – we will need to become more inventive. Areas like education and medical care have more externalities3, and are more often characterized by uneven expertise and access to information. As a result, pure market operations become less efficient and more problematic, creating critical roles for government. Thus, we should seek ways to allow the best features of individually-driven market mechanisms to perform in these spheres while designing the necessary protections against market failure.

Even conventional economic markets do not work effectively in isolation. Government enables markets in many ways – from establishing commercial law to providing public goods. We need government to invest in infrastructure, and to assure transparency and quality information flow, as necessary preconditions to efficient markets. Furthermore, in many situations the market under-invests: for example, employers will tend to under-invest in continuing workforce training, since the “product” (a trained worker) cannot be owned by the investors.

Government also has a role to play in addressing market imperfections, and in leveraging markets to serve public purposes more efficiently than the government might in undertaking the activities itself. Programs like the low income housing tax credit have succeeded because government uses them to leverage the market, rather than to supplant it (in contrast, for example, to public housing).

We need to get past the history of the Right telling us government is bad, and the Left telling us corporations are bad. Both can be done well or poorly, and we need to understand them as symbiotic, not in conflict.

The accumulated experience both in international economic development and in urban development in this country strongly attests to the importance of a sophisticated understanding of the relationship between government and markets. It turns out that the places with rigid, bureaucratic, top-down or corrupt governments stifle entrepreneurship, rather than attracting and enabling it, and fail to thrive. Particularly in the knowledge economy, “government 2.0” implies being more open, flexible and enabling of self-organizing activity – from web platforms that allow businesses to more efficiently take care of reporting and licensing activities to more participatory networks for business development of all kinds. Government must learn to be a nimble partner of business, while supporting and shaping markets in ways which align prosperity and equity.

Regions and neighborhoods
Economies don’t follow jurisdictional lines. Generally, neighborhoods, cities and suburbs share the same regional housing, labor and other economic marketplaces - and the same fates. On one hand, the region is built from the sum of its parts, which are located in neighborhoods, and so regional development organizations must pay attention to the people and places that are being left behind. On the other hand, neighborhood development practitioners must learn to better connect their local assets – underemployed people, underinvested real estate, untapped business opportunities – to their regional economies. Neighborhoods and regions are part of the same economic process, and the trick is to better understand and improve the economic markets and mechanisms that link the two4.

It turns out that we are, indeed, increasingly “all in this together.” For example, research on metropolitan areas reveals that, overall, places with less inequity grow more in wages, income and other measures of economic prosperity. This is primarily because these places are not wasting as many human and physical assets, and because they avoid the costs of poverty. Put differently, financial institutions, housing developers, retailers, employers and others are discovering and investing in the untapped opportunities in urban neighborhoods. Thus, they are expanding market activity in ways which better link neighborhood assets to regional economic marketplaces and, in doing so, simultaneously promoting both economic growth and equity.

Looking ahead
Once we see past old frameworks that highlight the conflicts, re-examining many of these dichotomies in the context of the knowledge economy suggests that, if not false, they at least can be approached differently. Rather than accepting the tensions as limitations, we can seek ways to transcend them by aligning the goals. For example, we can focus on increasing productivity through R&D targeted to produce innovations at the sweet spots where growth and equity, markets and government, neighborhoods and regions reinforce each other. Alignment does not entail compromise; it enhances achievement of all of the objectives.

Where are these sweet spots? Generally, in the knowledge economy, equity and growth seem to be aligning around factors such as the growing importance of human capital; the expansion of economic networks (which facilitate exchange of ideas and benefit from broad inclusiveness); the deployment of wasted assets; and recognition of the benefits of density5. This implies focusing on development strategies like targeting R&D tax credits for industries and products that expand inclusiveness; cluster-led human capital development; or transit-oriented development. The possibilities are enormous – if we stop fighting over old conflicts, and collectively engage in the exploration and experimentation needed to better define and seize these new opportunities.

  1. Many of the themes in this editorial are derived from, and much more fully explored in, a project of Opportunity Finance Network and CFED in which a broad range of economic development professionals convened for private discussions. The full project report, “Into the Economic Mainstream,” can be found at http://www.rw-ventures.com/publications/m-b_develop.php.

  2. Innovation is at least the primary source of all long-term economic growth and, as used here, inherently creates new value. Note that value creation needs to be distinguished from individual wealth creation, which can occur through simple wealth transfer or even value stripping - activities that do not increase overall wealth.

  3. For example, health and education provide social and economic benefits beyond the benefits captured by individuals or providers, who as a result may invest less than would be optimal for society overall.

  4. The conundrum in the economic development field between people and place can be resolved through similar understanding of the systems. People and place literally define and drive each other’s development in ways which mean interventions focused on either are always best designed and understood as influencing both.

  5.  Indeed, it appears that the goal of sustainability also now is aligning with economic growth and equity goals, as it too is furthered by taking advantage of wasted assets and density.

 
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Markets and government
Joseph E. Stiglitz, the Nobel Prize-winning economist, recently commented that Barack Obama’s speech on financial policy was, for economists, as groundbreaking as his landmark speech on race. The speech traced arguments about the respective roles of government and the private sector to the Founding Fathers, and highlighted that “Main Street” and “Wall Street” share a common destiny. Indeed, as the economic development world is discovering the power of markets and market-based development, the private sector is increasingly acknowledging the critical roles of government in enabling markets to work efficiently.

On the one hand, we need to harness the power and effectiveness of individual initiative and entrepreneurship, and of market mechanisms. After all, markets are the mechanism in our economy for investing in assets, and thus for creating wealth. Ultimately, markets are how our underinvested assets will get deployed and thereby realize their value. Also, the effectiveness of markets reflects that individual choice provides powerful incentives and self-regulating mechanisms. This implies that more programming, even for activities that are not primarily market-based, should put resources and decision-making power directly in the hands of individuals, who can then act more as customers, holding the programs and systems meant to serve them more accountable. This approach suggests experimenting with individual accounts and vouchers for everything from workforce training to small business support services.

However, as this approach is being applied in areas where market imperfections are more likely – and potentially devastating – we will need to become more inventive. Areas like education and medical care have more externalities3, and are more often characterized by uneven expertise and access to information. As a result, pure market operations become less efficient and more problematic, creating critical roles for government. Thus, we should seek ways to allow the best features of individually-driven market mechanisms to perform in these spheres while designing the necessary protections against market failure.

Even conventional economic markets do not work effectively in isolation. Government enables markets in many ways – from establishing commercial law to providing public goods. We need government to invest in infrastructure, and to assure transparency and quality information flow, as necessary preconditions to efficient markets. Furthermore, in many situations the market under-invests: for example, employers will tend to under-invest in continuing workforce training, since the “product” (a trained worker) cannot be owned by the investors.

Government also has a role to play in addressing market imperfections, and in leveraging markets to serve public purposes more efficiently than the government might in undertaking the activities itself. Programs like the low income housing tax credit have succeeded because government uses them to leverage the market, rather than to supplant it (in contrast, for example, to public housing).

We need to get past the history of the Right telling us government is bad, and the Left telling us corporations are bad. Both can be done well or poorly, and we need to understand them as symbiotic, not in conflict.

The accumulated experience both in international economic development and in urban development in this country strongly attests to the importance of a sophisticated understanding of the relationship between government and markets. It turns out that the places with rigid, bureaucratic, top-down or corrupt governments stifle entrepreneurship, rather than attracting and enabling it, and fail to thrive. Particularly in the knowledge economy, “government 2.0” implies being more open, flexible and enabling of self-organizing activity – from web platforms that allow businesses to more efficiently take care of reporting and licensing activities to more participatory networks for business development of all kinds. Government must learn to be a nimble partner of business, while supporting and shaping markets in ways which align prosperity and equity.

Regions and neighborhoods
Economies don’t follow jurisdictional lines. Generally, neighborhoods, cities and suburbs share the same regional housing, labor and other economic marketplaces - and the same fates. On one hand, the region is built from the sum of its parts, which are located in neighborhoods, and so regional development organizations must pay attention to the people and places that are being left behind. On the other hand, neighborhood development practitioners must learn to better connect their local assets – underemployed people, underinvested real estate, untapped business opportunities – to their regional economies. Neighborhoods and regions are part of the same economic process, and the trick is to better understand and improve the economic markets and mechanisms that link the two4.

It turns out that we are, indeed, increasingly “all in this together.” For example, research on metropolitan areas reveals that, overall, places with less inequity grow more in wages, income and other measures of economic prosperity. This is primarily because these places are not wasting as many human and physical assets, and because they avoid the costs of poverty. Put differently, financial institutions, housing developers, retailers, employers and others are discovering and investing in the untapped opportunities in urban neighborhoods. Thus, they are expanding market activity in ways which better link neighborhood assets to regional economic marketplaces and, in doing so, simultaneously promoting both economic growth and equity.

Looking ahead
Once we see past old frameworks that highlight the conflicts, re-examining many of these dichotomies in the context of the knowledge economy suggests that, if not false, they at least can be approached differently. Rather than accepting the tensions as limitations, we can seek ways to transcend them by aligning the goals. For example, we can focus on increasing productivity through R&D targeted to produce innovations at the sweet spots where growth and equity, markets and government, neighborhoods and regions reinforce each other. Alignment does not entail compromise; it enhances achievement of all of the objectives.

Where are these sweet spots? Generally, in the knowledge economy, equity and growth seem to be aligning around factors such as the growing importance of human capital; the expansion of economic networks (which facilitate exchange of ideas and benefit from broad inclusiveness); the deployment of wasted assets; and recognition of the benefits of density5. This implies focusing on development strategies like targeting R&D tax credits for industries and products that expand inclusiveness; cluster-led human capital development; or transit-oriented development. The possibilities are enormous – if we stop fighting over old conflicts, and collectively engage in the exploration and experimentation needed to better define and seize these new opportunities.

  1. Many of the themes in this editorial are derived from, and much more fully explored in, a project of Opportunity Finance Network and CFED in which a broad range of economic development professionals convened for private discussions. The full project report, “Into the Economic Mainstream,” can be found at http://www.rw-ventures.com/publications/m-b_develop.php.

  2. Innovation is at least the primary source of all long-term economic growth and, as used here, inherently creates new value. Note that value creation needs to be distinguished from individual wealth creation, which can occur through simple wealth transfer or even value stripping - activities that do not increase overall wealth.

  3. For example, health and education provide social and economic benefits beyond the benefits captured by individuals or providers, who as a result may invest less than would be optimal for society overall.

  4. The conundrum in the economic development field between people and place can be resolved through similar understanding of the systems. People and place literally define and drive each other’s development in ways which mean interventions focused on either are always best designed and understood as influencing both.

  5.  Indeed, it appears that the goal of sustainability also now is aligning with economic growth and equity goals, as it too is furthered by taking advantage of wasted assets and density.

Printed on Thursday, February 23, 2012
http://www.nextstreet.com/public_sector_initiatives/ideas_and_policy_perspective/old_conflicts_new_opportunities